Expect S&P 500 to retest 2,800

AS the S&P 500 index crumbled in the past week, fireworks were lit in the volatile complex. The mother of all short squeezes occurred in the VIX index as it spiked up 218 per cent from 11.71 to 37.3 since the S&P 500 index hit a record high on Jan 29, 2018. At the same time, the S&P 500 index only corrected 8.79 per cent. The disproportionate move between the S&P 500 index and VIX index was mainly due to the over-excessive shorts in volatility where speculators have been piling on since 2017, expecting things to remain relatively calm. At one point, the amount of shorts in the futures market, according to a Commitments of Traders (COT) report, hit an unprecedented high of 354,000 contracts.

A short squeeze of epic proportions creates chaos to the market as weak hands are forced to close out their positions, thus further lifting the VIX index higher, starting the vicious circle.

However, with the recent panic selling in the equity market, we might be seeing some opportunities to hop back in the market. The selloff that happened over the past two weeks took the S&P 500 index down 12 per cent from the 2,878 all-time high to the Feb 6, 2018 intraday day low of 2,529.